Public Finance: Taxation

Intro

Hans Martinez

Western University

September 5, 2024

What is Public Finance?

  • Field of Economics studying government revenue, expenditure, and debt, and how these influence the economy.
  • Governments raise revenue through taxes to fund public services
    • Both affect the behavoir of economic agents (consumers, firms),
    • Alter the structure and functioning of markets
    • Influence economic growth
    • Redistribute income across individuals
  • Focus of the course: Microeconomic (individual behavior) and Normative (how things should be; Positive: how things are)

Current Global Fiscal Policy Debates

  • Taxation of Digital Economy: How to tax multinational tech companies that operate across borders.
  • Climate Change Financing: Debates on funding climate initiatives through taxes or government spending.
  • Wealth Inequality: Discussions on progressive taxation to address rising wealth disparities.
  • Sovereign Debt Management: Strategies for managing and reducing national debts, especially post-COVID-19.

Taxation of Digital Economy

Figure 1: There is a geographic mismatch between the location of individuals who use digital platforms and the location where those products are developed.

Source

Taxation of Digital Economy

  • Unlike traditional companies, whose profits are taxed at value creation, digital technology companies conduct most transactions electronically.
  • This makes it challenging to capture where value is created, what it is, and how to measure it.

Taxation of Digital Economy

  • Additionally, companies are taxed through permanent establishment rules, which are largely based on physical presence.
  • So, while digital technology companies operate virtually all over the globe, their profits are taxed only in the state where they have a physical establishment.
  • What economic effects might this have?

Source

Digital Service Tax (DST) in Canada

  • The Digital Services Tax will be effective the 2024 calendar year
  • The DST is a 3% tax on Canadian‑source digital services revenue earned by large domestic and foreign taxpayers

Digital Service Tax (DST) in Canada

  • In‑scope revenue would generally be comprised of Canadian-source digital services revenue arising from:
    • online marketplace services
    • online advertising services
    • social media services
    • the sale or licensing of user data obtained from an online marketplace, a social media platform or an online search engine

Source

Canada’s Fiscal Policy and Taxation Issues

  • Tax System Overhaul: Calls for a comprehensive review of the Canadian tax system, last overhauled in 1967, to simplify and ensure fairness in taxation.
  • Carbon Pricing: Ongoing debates around the effectiveness and fairness of carbon pricing mechanisms in reducing emissions and their economic impact.
  • Tax Avoidance and Evasion: Increased focus on combating aggressive tax avoidance, particularly involving offshore entities and digital currencies.

Canada’s Fiscal Policy and Taxation Issues

  • Transfer Pricing: Scrutiny of cross-border transactions to ensure fair taxation of multinational corporations operating in Canada.
  • Public Debt Concerns: Managing rising public debt and interest payments, especially in light of increased government spending on social programs and infrastructure.

Canadian Issue: Carbon Pricing

  • Canada’s carbon pricing system is a cornerstone of the country’s plan to tackle climate change.

  • However, it faces criticism regarding its economic impact, fairness, and effectiveness in reducing emissions

  • Conservative Leader Pierre Poilievre argues against the carbon tax saying it makes current inflation worse

Source

What is the Carbon Pricing (Tax)?

  • There are two systems for pricing carbon in Canada: the fuel charge applied to consumers, and another system applied to industrial emitters.

  • The April 1 (last) increase amounts to about three cents more per litre of gasoline.

  • By 2030, though, the price on carbon would add nearly 40 cents per litre

  • The gradual increases are meant to act as a financial incentive for people and businesses to change their behaviour to burn less fossil fuels and transition to greener forms of energy.

    • Switch from a gas-powered vehicle to an electric.

Source

Does the Carbon Tax Work?

Source

Does the Carbon Tax Work?

  • A recent study estimates the the fuel charge will contribute between 8 and 9 percent of avoided emission by 2030

  • The industrial-emitter carbon pricing will contribute between 23-39 percent

  • Data released in by the Federal Government shows, however, by 2030 the reduction in emissions is expected to be 12 per cent below what emissions would be without carbon pricing

  • On the economic side, by 2030 Canada’s GDP will be $25 billion lower that it would have been without carbon pricing

Carbon Rebate

  • The carbon tax applies to residents in Newfoundland and Labrador, New Brunswick, Nova Scotia and Prince Edward Island, Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut.

  • Ninety per cent of the government revenues are returned to households in those provinces through a quarterly rebate program, with households receiving a quarterly payment based on family size.

Carbon Rebate

Source

How Carbon Pricing Works

How Does Canada Tax Code Rank?

International Tax Competitiveness Index

  • The Tax Foundation’ s International Tax Competitiveness Index (ITCI) measures the degree to which the 38 OECD countries’ tax systems promote competitiveness

  • The ITCI attempts to display not only which countries provide the best tax environment for investment but also the best tax environment for workers and businesses.

  • Canada ranks 15 in the OECD

Figure 2: Canada’s Rank at the International Tax Competitive Index

Sources of Revenue

Corporate Taxation

The corporate income tax is a tax on the profits of corporations.

Consumption Taxes

  • Consumption taxes are charged on goods and services and can take various forms.

  • In the OECD and most of the world, the value-added tax (VAT) is the most common consumption tax.

Consumption Taxes

Taxes in Canada

Taxes in Canada